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Edited Transcript of Zenith Bank Earnings Conference Call or Presentation 7-Aug-18 1:00pm GMT

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June 5, 2020

Q2 2018 Zenith Bank PLC Earnings Call

Edited Transcript of Zenith Bank PLC earnings conference call or presentation Tuesday, August 7, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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  • Michael Anyimah

Zenith Bank Plc – Head of IR

  • Mukhtar Adam

Zenith Bank Plc – CFO

  • Peter Amangbo;Group MD, CEO & Executive Director

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Conference Call Participants

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  • Craig Metherell

Avior Capital Markets (Pty) Ltd. – Research Analyst

  • Jerry Nnebue

CardinalStone Partners Limited, Research Division – Analyst

  • Kaitlin Byrne;Prudential Investment Managers;Portfolio Manager
  • Muyiwa Oni

SBG Securities (Proprietary) Limited, Research Division – Heads of Equity Research for West Africa

  • Olamipo Ogunsanya

Renaissance Capital, Research Division – Sub-Saharan Africa Banking Analyst

  • Olubunmi Asaolu

FBNQuest Capital Limited, Research Division – Head of Equity Research

  • Tolu Alamutu

Tellimer Research – Director & Credit Analyst of Banks

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Presentation


Operator [1]


Welcome to the Zenith Bank PLC H1 2018 Investor and Analyst Conference Call. (Operator Instructions) Just to remind you, the call is being recorded. I’ll now hand the floor to our host, Mr. Peter Amangbo M.D. Please begin.


Peter Amangbo;Group MD, CEO & Executive Director, [2]


Good afternoon and welcome to Zenith Bank’s half year 2018 presentation of our financial statement. With me on this call this afternoon, I have members of our executive committee. I have Deputy Managing Director, Ebenezer Onyeagwu; I have Dennis Olisa, Executive Director; I have Dr. Temitope Fasoranti, Executive Director; I have Mike Anyimah, our Group Treasurer; I have Joshua, acting Head of Risk Management; and of course, I have Mukhtar Adam, our Chief Financial Officer.

The presentation is already posted on our website. But I’ll just give a brief overview. I’ll start with the macroeconomic environment. GDP has been positive with (inaudible) growth of 1.95% year-on-year for Q1 2018. Inflation moderated to 11.23% in June 2018. Oil prices have been on the upward rise at an average of $70 per barrel. Foreign reserve at an average of $47 billion per barrel. It’s also important to note that interest rates dropped sharply from the beginning of the year up to date. Treasury rates dropped from an average of about 20% as of December 2017 to an average of 12% as we speak. It’s also important to note that there is a gradual convergence of exchange rates in the I&E window on the wholesale market. As such, today, the wholesale rates is approximately 351 thereabouts while the I&E is 360. So we are very sure that in no distant time, we should have a convergence of those 2 rates. Then we will have to now contend with the retail CBN rates and annualizing (inaudible).

Commenting to Zenith and our performance. I’m happy to announce that we’ve closed the half year with a profit before tax of NGN 107.4 billion. Our (inaudible) is quite a good result based on what we projected and in spite of all the challenges we have in the system.

If you look at our balance sheet, you will note that our balance sheet dropped marginally. It’s actually deliberate because we’ve adopted a smarter way of managing our balance sheet. Our focus is on efficiency and not just size. And that’s why you’ll find our liquidity management is now at the core of our strategy going forward.

We will continue to look at ways of improving our performance, increasing our deposit base essentially from the retail side. Emphasis is on demand deposits and also low cost fixed deposits. Barring any unforeseen circumstance, we believe that the second half of the year should witness a slightly higher growth than what we had in the first half of the year.

I want to stop at this junction to allow our Chief Financial Officer, Mukhtar, to take us through the numbers. And thereafter, we will have sufficient time for questions and answers. Thank you very much. And Mukhtar, over to you, please.


Mukhtar Adam, Zenith Bank Plc – CFO [3]


Good afternoon. My name is Mukhtar Adam, I’m the CFO. I’m not going to go through the slides. I’m just going to look at the key points that drove the performance during the half year.

Our PBT was NGN 107.4 billion, an increase of 16% from the NGN 92.2 billion reported in June 2017. And this was driven largely by our efficient treasury and liquidity management in the midst of low yielding environment as you can see that our deposit [dropped] .

We closed — we reported an ROE of 21%, which was flat and when compared to June 2017 with an ROA decline of 3% from 3.1%. This was largely due to dividends that was higher in last year that affected the effective tax rate. So half year 2018. You would also notice that our gross revenue declined as a result of decline in our interest income and trading gains. Within the half year 2018, yields on treasury bills dropped by about 800 basis points and this accounted for the growth in our interest income. As a bank, we responded to the decline in the top line by shifting our focus from fixed deposits to less expensive savings deposits. This resulted in a 39% reduction in our interest expense from NGN 123 billion in 2017 to NGN 74.7 billion in 2018, pushing cost of funds down to 3.4% from 6.4%. It also pushed our NIMs up to 10.1% from 8.6%. Impairment charge also reduced during the period by NGN 77 billion. That is by — from NGN 4.42 billion to NGN 9.7 billion. I’ll take it again. During the half year, June 2018, our impairment charge reduced from NGN 42 billion to NGN 9.7 billion due to enhanced asset quality. These drove our cost of risk down to 0.9% from 3.6%.

On operating expense, we recorded a 6% increase in operating expense on account of additional AMCON charge due to the change in the basis of competition of AMCON levy to include off balance sheet assets. This resulted in about NGN [7] billion increase in AMCON charge, which is effectively the increase in our OpEx between June 2017 and June 2018. Therefore, the AMCON effect, we maintained a declining trend of our cost to income ratio which at June 2018 was 54.9% when compared to 56.7% in prior period. It is important to mention that the total AMCON levy for the 2018 financial year has been absorbed in H1. Hence, normal AMCON charge will be taken in H2.

Fees and commission income increased during the period, with the major increase coming from our fees on electronic products, which is in line with the overall growth in our retail business.

So from the performance point of view, what has clearly happened in this reporting period is that we have a 15% decline in our top line. But we (inaudible) it effectively by a 47% reduction in cost of funds, 75% reduction in cost of risk and 3% reduction in cost to income ratio to give us a 16% growth in PBT. Diversification of our revenue base is also helping the bottom line and we expect that to continue through the end of the year.

On the balance sheet, you can see that our deposit declined by 8% as a result of our deliberate strategy to change the deposit mix in order to reduce our cost of funds, which was achieved [superfluously] .

Fixed deposits reduced while savings accounts increased, reflecting Zenith’s increasing its market share on the retail business. We will continue to grow our deposits along this line and we plan to close the financial year end with a 5% deposit growth when compared to FYE ’17.

Our loan book shrinked (sic)[shrunk] due to early repayment during the period. However, we are exploring new opportunities to grow the loan book. For the remaining part of the year, we expect to grow the loan book by 25% from FYE 2017 levels.

On the quality of our assets, you can see that our NPL ratio was 4.9% when compared to 4.7% that we reported in the end of 2017. But you’ll also note that the absolute NPL did not increase as the absolute was just NGN 4 billion higher than 2017 levels. The increase in the ratio was largely due to the reduction in the loan book, not necessarily due to significant deterioration in the asset quality.

So from the balance sheet perspective, you can see that we are clearly repositioning our balance sheet for greater efficiency without losing market share.

There are other important issues that we need to mention here. For our NIM, net interest — for our net interest margin, in Q1 reports, interest income and from treasury bills that was held as a result of our swap transactions were reported as interest and similar income. That affected the NIM’s computation. However, in H1 2018 report, those incomes have been reported as part of trading income, which is consistent with the reporting we have adopted in prior periods. That needs to be mentioned. Then our adjusted NIMs that we have reported of 10.1% reflects the NIM’s computation that has included the interest income from swap treasury bills into the interest income for the purpose of NIMs computation. That is what we have referred to as adjusted NIMs. And we have done that consistently when compared to prior periods. Then IFRS 9 effect on our capital. For IFRS 9, we had an adjustment of NGN 108 billion against our retained earnings. This resulted in reduction in the shareholder’s fund by 12%. It’s also helped to increase our coverage ratio to 229%.

Due to these adjustment, the capital adequacy ratio of the group reduced slightly. We close with capital adequacy ratio of 21%, which is a very comfortable position. So that is the performance so far and some other things that we need to mention so far as the numbers are concerned. Thank you.


Peter Amangbo;Group MD, CEO & Executive Director, [4]


Thank you very much, Mukhtar, for that presentation. I think we will just go straight to Q&A.

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Questions and Answers


Operator [1]


(Operator Instructions) Our first question comes from the line of Clemence (inaudible) of RMB Capital Management.


Unidentified Analyst, [2]


My first question is on your interest income line. For Q2, I noticed the marked decline of 40%. And on the call, you were explaining about reclassifying some of the interest income to trading income. Was it also part of — was it [material business] for the marked decline weakness in Q2? And if not, is it just as the result of the low yield environment? And what are you doing currently to ensure you plug this revenue gap going to Q3 and Q4? My second question is on IFRS 9. Earlier in January, you had booked NGN 138 billion. [While at] H1 (inaudible) you revised it downwards by NGN 30 billion. I just want you to explain why the disparity. Then my third question is on your [trading] income. (inaudible) in that line, what do you expect for Q3, Q4? Do you expect [aftermath on] Q3 to Q4 to be stronger than what we had in the first H1, H1 ’18? Then my fourth question will be on your gross loans. I heard you mention 25% growth for FY ’17. I want to confirm, is it 25% or you mean 2.5%? Because as of H1, you’re already down by 10.7%. I just want to clarify your expectation for your loan growth for the full year 2018. Then lastly, my question will be on NPLs. Can I get a sense of your — the portion of your NPLs that are in foreign currency? And also a breakdown of your oil and gas NPLs into upstream, downstream services? Yes, that will be all.


Peter Amangbo;Group MD, CEO & Executive Director, [3]


Thank you very much. Mukhtar will take the questions on interest income, IFRS, gross loans and NPLs. Then Mike will take the question on the trading line. Mukhtar, over to you.


Mukhtar Adam, Zenith Bank Plc – CFO [4]


Okay. On the reclassification issue, the reduction in our interest income is not largely due to the reclassification, but is due to the low yielding environment which we have mentioned earlier. And then you can also see that our loan book actually dropped. So that accounted for the reduction in our interest income for the period. Then on IFRS 9, yes, we did have NGN 130 billion as adjustment to retain earnings for our Q1 result. That was the initial estimate at the time that we were running the IFRS numbers. So after that, we have continued to stimulate. IFRS 9 relies heavily on forward-looking data. That requires a lot of stimulation. So we had continued to stimulate and we have worked with our auditors through the stimulation to arrive at what is a very good position for the retained earnings adjustments. So that is what happened there. On the loan growth, we were talking about 2.5%, not 25%. Thank you. Mike?


Michael Anyimah, Zenith Bank Plc – Head of IR [5]


Okay. For trading, with the normalization of the market, the effective arbitrage opportunity that was there are diminishing. So we are reverting to normal levels. So what you have seen is a normalized level of trading income. And so currently around NGN 6.8 billion for the first half of the year and we think this trend will continue for the remaining part of the year. So we shouldn’t expect any unusual profit from trading.


Peter Amangbo;Group MD, CEO & Executive Director, [6]


Thank you very much. Let’s take the next question.


Unidentified Analyst, [7]


Question on NPL and the oil and gas breakdown.


Peter Amangbo;Group MD, CEO & Executive Director, [8]


Okay. The oil and gas, if you look at our classification, what page we have that on the presentation, we’ve only separated the upstream from the downstream. So (inaudible) grouped together, they are actually separate there.


Unidentified Analyst, [9]


For NPLs? No, I don’t think so.


Peter Amangbo;Group MD, CEO & Executive Director, [10]


(inaudible) What do you have for the NPLs?


Unidentified Analyst, [11]


(inaudible) On the (inaudible) slide.


Michael Anyimah, Zenith Bank Plc – Head of IR [12]


Yes, for the NPLs, it’s together. You’re right. But you can see, most of this is oil and gas and [all of that] accounts for most of the…


Peter Amangbo;Group MD, CEO & Executive Director, [13]


(inaudible) talking upstream (inaudible)

We have more of the upstream. We can give you the exact breakdown at some point.


Operator [14]


The next question comes from Michael [Ren?e] of [SPG Securities] .


Unidentified Analyst, [15]


(inaudible) I just have a couple of questions. First, I just wanted to get a sense of what your view on (inaudible)


Peter Amangbo;Group MD, CEO & Executive Director, [16]


We are not hearing you clearly.


Unidentified Analyst, [17]


(inaudible)


Peter Amangbo;Group MD, CEO & Executive Director, [18]


Slightly better.


Unidentified Analyst, [19]


(inaudible)


Peter Amangbo;Group MD, CEO & Executive Director, [20]


No, it’s not clear at all. (inaudible)


Operator [21]


Our next question comes from the line of (inaudible) of FBN.


Olubunmi Asaolu, FBNQuest Capital Limited, Research Division – Head of Equity Research [22]


Bunmi Asaolu from FBN. First question, I just wanted to clarify. Beyond the early repayment on the loan book, could you just confirm whether there were any write-downs, especially on manufacturing and transports? Because the movement in your loan book and the NPL, I just wanted to confirm there were no write-downs, especially in those 2 sectors. And then what is driving the growth in communications and general commerce in terms of the loan book? And I mean, would you have preferred to have seen growth in the manufacturing and transport as opposed to the general commerce, for example? Given higher risk, I would’ve assumed in general commerce. Then if you could just talk around the movement in your NPLs from December to March to June because it went down, then it went up quite a bit. If you look from December to June, it doesn’t look like much happened. But if the decline in Q1 was down to maybe accounting or write-down, the lift from March to June is a bit worrisome. So if you can just give some commentary on that. And then linked to that, I can see that the coverage ratio is a real boost, right, going forward as per your guidance. But you’re slashing that cost of risk guidance from over 3% to 1%. I mean, what’s giving you the confidence to slash it this much? I’m asking specifically because your Q2 results were really boosted; the provisions line was a lifesaver. So if you can please comment on what’s giving you the confidence as you’re guiding [forward]? And finally, whilst we understand the way you may be led to guide on the tax rate, vis-a-vis dividends and taxable income, can you just spend a little bit more time explaining the distribution of the tax charge between H1 and H2? Because the Q2 charge was a real surprise, a negative surprise. So if you can just help us on that.


Peter Amangbo;Group MD, CEO & Executive Director, [23]


Mukhtar, please, go ahead.


Mukhtar Adam, Zenith Bank Plc – CFO [24]


Okay. Let me start from the last question that’s on the tax charge between Q1 and Q2. For us, our path is largely built on dividend tax because our dividend payout is higher than our taxable income. And you are not able to book those tax expense in the previous financial year. So you have to book it in the subsequent financial period. That can also be booked after your part AGM and the dividend has been approved. That happened in April. So before that April, you could not have booked the excess dividend tax. And once you book it, you have to take it immediately. You don’t have opportunity to spread it. So that explains the significant increase in the tax charge that you see for Q2. And then the movement in our NPL between December, March and June, you know that NPL is — depends on the specific [obligors]. Between December 2017 and June 2018, we have had a movement between the oil and gas and transport. The transport sector NPL has reduced and the oil and gas NPL has increased. Then between December to March, there was also movement between industry and some of them went down. But of course, between the March to June, 3 months is a lot of time in managing loans. So some other things that moved down have moved again. That’s what you are seeing. But if you look at it from, consistently, you can see that we are not too far from where we started from in December 2017. And that’s for the NPL. In terms of — you asked about write-down or write-off. For the period January to June, we have had some loan write-off but the amount is not significant to explain the drop in our loan book. The write-off was around NGN 13 billion, which is not significant. So the main cause for the drop in the loan book is pay down as we have mentioned earlier.


Olubunmi Asaolu, FBNQuest Capital Limited, Research Division – Head of Equity Research [25]


Cost of risk?


Mukhtar Adam, Zenith Bank Plc – CFO [26]


Yes, cost of risk. Of course, we are doing IFRS 9 and if you (inaudible) forward-looking data, you would know that last year, 2017, we took huge impairment of specific NIMs. That increased our impairment charge significantly. In the full year 2017, our impairment charge also increased significantly. So that was a period for us last year to fix as much impairment charge as possible, okay? So going forward, we would not expect to have higher impairment charges because we’ve actually taken the heat as much as possible in 2017. So we expect it to remain around this level, not go beyond this level. We don’t expect it to deteriorate.


Peter Amangbo;Group MD, CEO & Executive Director, [27]


Thank you very much, Mukhtar. Just to address your question on the growth in general commerce and the communication. You asked whether (inaudible) happier to see the growth in manufacturing. We already have a limit for all the different sectors. And I can assure you that we’ve not — we’re actually very comfortable with where we are. The important thing in lending, it’s not necessarily whether it’s manufacturing then it makes it less risky. Not necessarily. There are so many things that come into question if you’re going to rate a credit. So it is the [obligor], really. It’s as important as this sector that we are actually lending to — and the growth we are talking of, they’re not really very material. You can see that they (inaudible) in Q1 at 1.8%. So [you’re right] to make a comment.


Olubunmi Asaolu, FBNQuest Capital Limited, Research Division – Head of Equity Research [28]


Yes, I just wanted to quickly follow-up on the cost of risk guidance comment. I understand the year-on-year comparison, where you were before and what may have changed IFRS 9 from (inaudible). But the — what I’m really talking about is the guidance you’d given before was over 3% and that guidance that was given this year, post some computation and [stimulation] of IFRS 9. So are you saying that you’re just a lot more comfortable, whereas in — maybe 3 or 4 months ago, you were just being super conservative?


Mukhtar Adam, Zenith Bank Plc – CFO [29]


Okay. I will not say super conservative. But we have always said, for us as a bank, we are very prudent. Whenever we see a possible deterioration in our loan book, we don’t wait till it happens. We take a forward step. And I referred you to June 2017, where we took heavy impairment charge on certain specific NIMs that was showing signs of deterioration at the time that we could have waited to the end of the year or this year. So that is the way we approach our credit risk. As soon as we see a sign of deterioration, we take the impairment and continue from there. So it — we are very prudent in our impairment charge. That is what has happened in 2019. So in — sorry, in 2017. Now in 2018, we don’t have any such situation like that at hand. So — but if any of them comes, we are going to take a prudent impairment charge as soon as we see those signs. We are not going to wait. The guidance given was based on IFRS 9. So we are going to monitor the guidance again and see our loan book. If we need to revise the guidance, we will, but for now is — that is the guidance. We don’t expect the cost of risk to increase significantly.


Michael Anyimah, Zenith Bank Plc – Head of IR [30]


Okay. Just to add, the current guidance you’re seeing is based on IFRS 9. The one we gave for full year 2017 was before IFRS 9 provision, and that’s why it was that high. Now with the provision taken, it has dropped in terms of guidance. That’s why it is this low. Just so…


Operator [31]


The next question comes from the line of Craig Metherell of Avior Capital Markets.


Craig Metherell, Avior Capital Markets (Pty) Ltd. – Research Analyst [32]


Just some questions around where you see growth coming from in H2. Mr. Amangbo mentioned that you believe H2 will be better than H1. I mean, if we just look at — outside of the various cost control measures that you’ve implemented, so obviously, you’ve [cited] heavy emphasis on reducing cost of funds, operating expenditure; growth has been contained, largely driven by AMCON charge. And then you’ve obviously seen a normalization in cost of risk. So in those low yield environments and perhaps it might feed into your loan growth guidance which is pretty ambitious of about 15% for the remaining 6 months of the year, where exactly do you see the catalyst for earnings growth to come from? And if you could just talk to the kind of sectors that you believe you can obviously lend to? And does that specifically feed into your loan to funding guidance of 65%, which is quite a lot higher than it is at H1? And then if I could just ask on the account management fees. So half year, on the previous half year in the comparative period, it looks pretty — it looks in order. But H2 last year was quite a phenomenal period for the current account maintenance fees; it was a large base for the full year. Is the H2 performance repeatable? Or do you think that this is a more normalized level from the account management fee? And then just one last question on IFRS 9, the change from the NGN 138 billion revised down to NGN 108 billion of retained earnings. Were the auditors involved just as much in the initial adjustment as they were in these audited numbers? And perhaps the forward-looking environment has changed sufficiently just to obviously justify that change.


Peter Amangbo;Group MD, CEO & Executive Director, [33]


Okay, thank you very much. I’ll just take the first part of the question. Where do we see growth coming from? Well, you can see that the environment is still very much challenged. That is not in doubt. And the H2 and H1. For H2, you recall, which you already mentioned, that AMCON charge, we paid NGN 28 billion in the first half. For second half, that in a way is almost tantamount to NGN 7 billion. Because there’s no AMCON charge that will come up in H2. But from a real business perspective, you find — you will see that our retail is on the upward trend. That segment of our business. And we are very bullish and aggressive about it. We have said that as we move on, month on month, we are recording very good progress and we see that as a major growth area. I want to talk about this. I’m looking at that across all the channels, whether in terms of deposits or in terms of the fees from the electronic channels that we have. Also from the manufacturing sector, we still see some opportunities there with the introduction of the differentiated, the CRR, which Central Bank is promoting, whereby people can actually grow money at 9%, we believe that, that will be an incentive for a lot of the manufacturers. So come up with expanded lines and also new lines and products. The agreements are started. They are very enthusiastic and we believe that, that is also a growth area. I don’t think that is going to be a case of taking a bigger risk move. All the transactions we are going to do on this versus the CRR, will still fall within our risk assistance criteria and we are still going to [begin it] with the same profile of customers. So we expect that we should see growth in this specific area. Also, we have opportunities to also grow on the corporate side. GDP is actually — the growth is slightly muted. But we have said that even if we record another 0.5 to close the year, let’s say at 2%, that itself should actually help. We expect that there will be much more activity in the economy from the (inaudible) driven in the next 5 months and that also has a way of boosting economic activities. So if you look at all these factors, we are quite positive that H2 was slightly better than H1. Mukhtar, you can [take that other] part of the question.


Mukhtar Adam, Zenith Bank Plc – CFO [34]


Okay. On the accounts maintenance, you could see that we mentioned earlier, our deposits actually dropped and account maintenance is a function of volume of transaction. That’s one. You will also see that our fees on electronic products increased, okay? So you are seeing transactions being done through different electronic platforms that is giving us fees. So we are compensating for the drop in accounts maintenance. However, in the second half of the year, we expect to see much more increase in the volume of transactions within our bank and then would expect the account maintenance fee to be higher than what it is in half year. We also expect that fees on electronic products to continue increasing, okay? So then on IFRS 9, the initial assessment for Q1 was our internal assessment because we don’t do audits for Q1, okay? That assessment was higher, which is a reflection of our conservativeness when it comes to risk management and in taking provision or impairments. However, the one for half year was reviewed by auditors and of course also reviewed by the Central Bank. And then for — before we finalized.


Operator [35]


Our next question comes from (inaudible) of EFG (inaudible).


Unidentified Analyst, [36]


My first question is on [a developed] Nigeria. I think based on the discussions we were having at the full year results, you mentioned that (inaudible) has been classified as an NPL. However, when I look at your NPL classification over the first half, NPLs from the communication sector is only around 2%. So that doesn’t seem to be the case. So is it a case that you’ve written off the (inaudible) loan? Or this is a loan that you haven’t classified as an NPL but still provided for? My second question is to do with your NPL cover. I guess you’ve done a lot of explaining about IFRS 9 provisioning. But my question was why do you need such a high NPL cover? Your NPL cover is now close to 200%. From what I believe, your specific NPL cover, your stage 3 NPL, covers upwards of 100%. Why would you require such a high NPL cover, especially given the improving macroenvironment? And then my third question is on Ghana. Can you just update us on what the capitalization level for Ghana is and how you will meet the new capitalization requirements from the Bank of Ghana? And finally on macro. If I could just pick your brains on why there’s been such a weak correlation between the high oil prices and the macro in Nigeria. I mean, compared to historical levels, we are seeing much retail growth despite the substantial improvement in oil prices, and I’d like to get your thoughts on why that might be.


Peter Amangbo;Group MD, CEO & Executive Director, [37]


On the provision.


Mukhtar Adam, Zenith Bank Plc – CFO [38]


Okay. On the NPL, IFRS 9 NPL, the provision you are seeing is based on the rules or the principles as laid down by IFRS 9. And so we don’t have much room to maneuver. We have to keep to the rules and the principles in IFRS 9. And then also — so it is going to give us a high NPL — a high NPL cover. But you see, if you look at it, you are trying to apply the IFRS 9 retrospectively. That’s why the standard is allowing you to take the charge from retained earnings. So you’re saying that if you have to apply that standard backwards, how will it impact you? It will definitely have a bigger impact. That is why you are seeing that huge amount. So it’s not a decision that a bank has to make, it’s based on the standards. So our NPL cover, that is what it is. You’ll also note that prior to now, we were having credit risk reserve as guided by the Central Bank because our IFRS impairment charge impairment was higher than the CBN impairment. So we are having credit risk reserve. But now because it is high, we don’t have that credit risk reserve again. So previously, if you add the credit risk reserve and the impairment on the balance sheet, we are still reporting a loan-loss cover of above 100%. So it’s still not too much out of range in our view. Then capitalization for Ghana. Zenith Ghana was among the first bank to — the first bank, actually, to fully comply with the capitalization requirement. That is done. We don’t have an issue with that capitalization requirement. Then…


Michael Anyimah, Zenith Bank Plc – Head of IR [39]


Macro. I think the other — the other one (inaudible) macro.


Mukhtar Adam, Zenith Bank Plc – CFO [40]


EMTS. Then you asked whether EMTS was classified or not. EMTS is not part of our NPL. But we are taking provision that is commensurate with the risk and the status of the EMTS launch. We did that from last year June 2017.


Michael Anyimah, Zenith Bank Plc – Head of IR [41]


On the macro, you asked on why we don’t have a positive correlation between price growth and the economy. You remember that we have come from a very deep recession, and it’s something that’s not happened to us since 1985 or thereabout, and so we are in the recovery mode. We are coming out of it, and it’s a gradual process. (inaudible) 1.9%, IMF projects 2.3% for full year 2018. We get [2019, we’re better]. So our (inaudible) price will need to stay where it is. Production level growth, economic growth will continue to improve.


Operator [42]


Our next question comes from the line of Tolu Alamutu of Exotix.


Tolu Alamutu, Tellimer Research – Director & Credit Analyst of Banks [43]


I have a few multi-follow-up questions. The first is could you please tell us what exchange rate was used to compute the balance sheet as of the end of June? Second question is about the Q-on-Q changes in gross loans. It looks like there was an increase in agricultural loans and also loans to the government. I just wanted to confirm if that’s correct and if you are comfortable with your exposure to the government going into the elections? Third question relates to 9mobile. I understand it’s not classified, but could you maybe tell us what the coverage ratio is for that loan at the moment? Next question relates to NPLs and restructured loans. There was also movement in restructured loans. And then it looks like restructured loans in oil and gas fell in the first half, but then NPLs in oil and gas increased. I just wanted to know whether that NPL increase was restructured loans flowing into NPLs or whether those NPLs are new. And if those NPLs are in any way related to air and energy? And finally, your — you have a bond that’s due next year, the NGN 500 million bond. I was wondering if you could comment on whether you intend to replace that or just pay it down? Or whether you have other plans regarding issuance? The reason I ask is looking at your disclosures, it looks like the U.S. dollar balances — U.S. dollar cash balances on your balance sheet decreased in the first half. So I just was wondering maybe you could comment on FX liquidity, in general. That would be great.


Mukhtar Adam, Zenith Bank Plc – CFO [44]


Okay. On the exchange rate that we use, we use NIFEX as of June, which was around 331. So that is the exchange rate that we used. Then on EMTS, you also have to know the coverage. We have taken impairment charge on EMTS up to 50%, okay? So that is the coverage on EMTS. NPLs on restructured loans. We have some NPLs coming in for oil and gas, okay? And not necessarily restructured. But they are new, those that are coming in, that we have to take them in as NPLs.


Michael Anyimah, Zenith Bank Plc – Head of IR [45]


And the reason why the NPL — the restructured loan of oil and gas went down because power came up. (inaudible) change but because power increased, the percentage dropped.


Peter Amangbo;Group MD, CEO & Executive Director, [46]


I think that covers — the eurobonds. Okay. Eurobonds. That will be paid off when it matures.


Michael Anyimah, Zenith Bank Plc – Head of IR [47]


So you wanted to know where this also comes from. We have assets that will be maturing about that time, and we intend to use those assets to pay down the eurobond. And so our card balances today is not what you’re going to use to pay down eurobonds so that you’ll be comfortable. We are not reissuing, we’re paying them.


Tolu Alamutu, Tellimer Research – Director & Credit Analyst of Banks [48]


Okay. So if I may just go back to the question on Q-on-Q loan changes, gross loan changes, especially your exposure to agriculture and the government and how comfortable you are with increasing lending to the government going into the elections, please?


Peter Amangbo;Group MD, CEO & Executive Director, [49]


Okay. I think the — whether election or not, it’s not clearly an issue as far as we are concerned. We’ve had elections in this country from 1999. We’ve had almost about 4 or 5 changes in government. So that in itself is not a concern to us. But in terms of lending, we’ve adopted the same approach of being very conservative. If we charge the NPLs by sector, public sector is almost nothing there. But I can tell you that some of the facilities, you have reliable cash collection (inaudible) credits really, so there’s really nothing to worry about in terms of the marginal increase of loans to the public sector.


Michael Anyimah, Zenith Bank Plc – Head of IR [50]


I think one other thing to add is if you look at the loan position for 2017, you realize that manufacturing had a proportion of about 12.7%. Where between year-end 2017 and now, we’ve had some pay down in manufacturing. So that drop in the proportion of manufacturing, now maybe it looks like or that sector that didn’t experience a drop came up a little bit higher. That is also another reason why you see government and agreed going up slightly.


Operator [51]


Our next question comes from the line of (inaudible) of ARM Investment Managers.


Unidentified Analyst, [52]


(inaudible) from ARM Securities. My first question is I want to know what is on Zenith Bank’s (inaudible) position? And then second one is what is the longest maturity on your derivative positions? And also I was wondering that there’s been an increase in your composition of NPLs in the oil and gas sector, did that increase from about 37% to about 45%. So is that all driven in diversity?


Michael Anyimah, Zenith Bank Plc – Head of IR [53]


So for our derivative exposure, our absolute nominal value of derivatives is about $4 billion. Absolute nominal value about $4 billion and most of them are closed. Most of them are closed. So most of them are closed and back-to-back transactions. They are not open for sale. I think you asked about growth. We don’t expect it to grow dramatically. We maintain an exposure about NGN 1.5 billion on this (inaudible) and I think that will remain into next year.


Peter Amangbo;Group MD, CEO & Executive Director, [54]


You see if I check the ’19 for the details, you have the different currency breakdowns there. The derivative assets are there.


Mukhtar Adam, Zenith Bank Plc – CFO [55]


Okay. And on the NPL in the oil and gas sector of the group, we’ve mentioned that it’s a specific name. It’s not a general — we don’t have so many customers that are coming into the NPL. It’s a specific name that are required to be classified that was done.


Unidentified Company Representative, [56]


Then if you also look at it, total loan book came down when compared year-on-year. So that also explain why you see that in 2018 now. The NPL will appear to have increased. But if you look at absolute amount year-on-year, you’ll see a drop between current year figure and 2017 figures.


Operator [57]


Our next question comes from the line of Kaitlin Byrne of Prudential.


Kaitlin Byrne;Prudential Investment Managers;Portfolio Manager, [58]


If you could just expand more on that electronic service fee. The increase of the — it looks like the increase in volumes is the same but the increase in value is significantly different. I mean, is this a once-off impact? I mean, what sort of growth rates can we expect in this area going forward? And have you increased the charge? Or is it nearly the size of each of those transactions? And the next question is on whether you’re able to disclose the net effect of the swaps you are doing in the prior year? So taking into account the cost of funding for those swaps as well. And then if you can just talk to the geographies and the profits which you disclosed. It looks like Europe significantly improved. Was that just an impairment issue in Europe which is no longer in the profits for this year?


Unidentified Company Representative, [59]


Okay. So I’ll take this one. Most of the swap we have in the books is FX swap. So what I do is typically assess swap and I buy forward in the future. We’ve been doing this for a while. We’ve maintained the same level of position in that about $1.5 billion, and I don’t think it will change going into next year. For what we see, we’ll probably maintain that going into next year. However, if the interest rate in the 2 markets, the dollar market and the naira market, move quite dramatically, that might affect our eventual position.


Michael Anyimah, Zenith Bank Plc – Head of IR [60]


Then on the electronic services, what you see there is we are extending our footprint extensively in the market and within the (inaudible) segments, apart from introducing new products to capture a reasonable share of the market. We’re also cross-selling as new products demand. So that is also giving rise to increase in terms of the value and the volume. We will expect that this will continue to go up because we are steadily making the right investments in IT infrastructure to drive this. [Revamping] our processes, our procedures so that the business with all this stuff evolving. And we — our team, we are also quite strong in terms of new product development. So we will continue to do that. And these are targeted as specific segments.


Mukhtar Adam, Zenith Bank Plc – CFO [61]


Okay. Thank you. Yes, well, taken the euro, their contribution report by geography. Yes, euro did improve, that is our pressure in Zenith U.K. And you asked whether it’s because of impairment issue. Partly due to, yes, impairment and operational efficiencies. That cut across the members in the group. We improved in impairment charge and also operational efficiency. Yes. That’s the answer.


Operator [62]


The next question comes from Muyiwa Oni of SBG Securities.


Muyiwa Oni, SBG Securities (Proprietary) Limited, Research Division – Heads of Equity Research for West Africa [63]


I have a few questions and follow-up questions. I think the first is on the e-banking volume and income growth. What I wanted to understand was your customer penetration in that e-banking space. So in terms of percentages, how — what number will you place to penetration on the retail space and on the corporate space? I think that would help to understand the scope for growth for income in that line. And then secondly, Mr. Amangbo referenced the new liquidity maintenance strategy. I also wanted him to elaborate on that a bit more. And then, thirdly, on the differentiated CRR. Could you share the potential volume that we could see on loans? And I think that number could come from what you expect from central release from Central Bank on the CRR. And then lastly, just wanted you to share your thoughts on — I think it was a point the Central Bank Governor made at the last NPC meeting on CP, longer-term CPs driving credit penetration to the real sector, wanted to get what your view was on that and how that could drive credit growth for the sector?


Peter Amangbo;Group MD, CEO & Executive Director, [64]


Thank you. I think for the question on the electronic banking, talking about the volume number, if you go to Page 31, you will actually see the relativity across the very popular product that we offer. You’ll be able to compare the type of growth we witnessed this first half and the comparative figure we have in prior periods. So if you look at that, I can assure you that going forward that type of increase will not be significantly different. There’s still a lot of scope for improvement in that particular area, and it’s not really dependent on probably trying to compare between corporate and the retail. But I can assure you that the retail market is still thriving, and we’ll take advantage of every opportunity in that particular space. Want to talk about the efficient liquidity management strategy. It’s all about balance sheet management. It’s not the volume of deposits that you have that matters. The important thing is how are you able to utilize these deposits. And the key is also to ensure that you are able to generate low-cost liquidity and fees and that’s what we are focused on as against the volume itself. It’s more about for every deposit we have, for every liquidity we have in our system, we should be able to optimally utilize it such that the yield will ultimately be positive. On the differentiated dynamic CRR, I can’t actually place a figure on it as it is to signal this is x that will do or y that will do. Remember that is [for what is worthy] for the bank to present, our Central Bank will take the ultimate decision. But for now, suffice to say that it’s been quite positive in terms of the response of our customers in the manufacturing and agric sector. Those who are in the productive sectors of the economy. They’re quite (inaudible) and they [won’t] take advantage of this. So I’ll probably say we’ll wait and see how things unfold. Then your last question on the — one of the NPC resolutions on the longer-term CP. Well, I think Central Bank will be in a better position for now to address that. So let’s just adopt a wait-and-see approach when we get details of how this will be actualized. Thank you very much.


Operator [65]


The next question comes from (inaudible) from (inaudible)


Unidentified Analyst, [66]


I just want to get an idea of how you guys see the interest rate environment evolving over the next year, beyond H2? And how you see those impact NIMs next year? So this year, you guys have indiscernible] NIMs for sustained growth, despite the deduction in your (inaudible) as well as the slight reduction in your loan book and deposits. Do you maintain a mainstream deposit growth of 5% (inaudible) maintain that projection for the second half of the year and where do you think — why you maintain this here and also on the early (inaudible) Q1 and H2 of over NGN 100 billion and I’d like to see (inaudible) within this product.


Peter Amangbo;Group MD, CEO & Executive Director, [67]


Okay. I think I didn’t get all your questions very well. But at least I know you talked about what do we think of the interest rate environment in the second half of the year. But I would like to say if you look at the…


Unidentified Analyst, [68]


Beyond the second half.


Peter Amangbo;Group MD, CEO & Executive Director, [69]


So beyond the second — okay, yes. I think that is good, too. Let’s take it one step at a time. Let’s start with the H2. As I said, if you read the NPC report, it captures both sides, everything in terms of H2. And we are very unanimous in terms of what the interest rate environment would be. And if you look at the decision, yes, they kept all the rates static, but the report also acknowledged the fact that there’s a lot of pressure to actually increase interest rate. Even the 2 different team members in that particular report, the minority reports, they were very clear. They said look, they should move up the rate. There was a majority who acknowledged the fact that there’s a lot of pressure. And that’s why we tried to use other means to actually arrive at an equilibrium position. Of course, the dynamics here is one of them. So that they don’t actually offset the position that we have currently now. I’m not going to say there’s some pressure there. I don’t see interest rates going down below where we are currently, because of the current state of the market. So at best, maybe we’ll stay exactly where we are for the next half of the year.


Unidentified Analyst, [70]


Okay. Sorry. So just a follow-up as well. I was asking about your deposit growth guidance being up 5% despite a reduction of — on half year. Why you guys (inaudible) and also there will be NGN 100 billion deduction of your — your domiciliary deposits, I don’t know if there’s any comparison for that.


Peter Amangbo;Group MD, CEO & Executive Director, [71]


Well, I think the dom accounts dropped quite (inaudible). But in terms of our overall deposit growth projection, it was (inaudible) that we should be able to grow deposit from where we are. We allot quite a lot of funds to lead because of pricing basically. Not because we couldn’t have grown deposits much, much harder than where we were at. But it has to do with part of our strategy (inaudible) we want low-cost deposit. And even within that constraint, we have spent our (inaudible) our deposits for that. If we check our savings, it’s been on the upward trajectory. And we expect that on the retail side too, we expect growth along that line. So all in, we will expect that the deposits will grow. There’s not too much emphasis on the dom accounts as it is because one, we are not — there’s not too much appetite for dollar lending. So if we are able to grow the naira deposits, we will be fine.


Operator [72]


Our next question comes from Ola Ogunsanya of Renaissance Capital.


Olamipo Ogunsanya, Renaissance Capital, Research Division – Sub-Saharan Africa Banking Analyst [73]


You mentioned earlier that the shrinking of the balance sheet was deliberate. So I just wanted to confirm, is there an internal target for what you think an optimal balance sheet size is? And secondly, on the deposit decline also, that was said to be deliberate or expect to retain expensive deposits? But if I look on a quarter-on-quarter basis, you actually saw some growth in your 10 deposits. So could you please explain what happened in that regard? And my third question is on the reclassification of income. So I just want to clarify, what should we expect going forward? And if Mukhtar could please confirm how you compute the adjusted NIM, that will be helpful. My other question is a follow-up question to the coverage ratio at 200%. So at these levels, shouldn’t you be able to write-off some of these loans? Or is it time to because we need some of these provisions as profits in subsequent periods? And my final question was on the rate used for the balance sheet. So the financial statement said 334 — or 344, sorry, which is different to what was mentioned earlier. So I just wanted to clarify that. I think those really are all my questions for now.


Peter Amangbo;Group MD, CEO & Executive Director, [74]


Okay. Let me just take the — what — we did not — I did not say that it was deliberate to cash — a deliberation to cash our balance sheet or our deposit base, no. That is not the message. What I’ve said is I’m talking about efficient management of the balance sheet and our liquidity. And if in the process of that, you’ll have to let some deposit go, so be it. But at the end of the day, it’s not how much you have in deposit that matters. It’s more about your net margin on those deposits. I think that is the message, really. If we’re able to get double the deposit we have to date or increase our balance sheet by 100% at this type of price, it’s very comfortable price, and of course, we’ll be too happy to do that. So we are not talking about cashing our deposits or cashing our balance sheet. No, that’s not the message. We are just saying that we want to have on our balance sheet a type of number than deposits that will give us a different margin. Mukhtar, want to talk on the NIM?


Mukhtar Adam, Zenith Bank Plc – CFO [75]


Okay. On the reclassification, I did mention that what we have reported in half year 2018 is consistent with what we have reported in previous year. The only exception was Q1 2018. So we are going to be consistent from where we are now. So that’s what [you see, you] should expect in terms of the classification of the income. Then on NIMs computation, we have interest income on treasury bills that we are holding on swap. The treasury bills we are holding for swap, we are earning interest on them. So that interest income is added to the interest income on the other side of the income statement, okay, for NIMs computation because the dollar fund that we are using for the swaps, they are through interest expense and the interest expense is reported as interest expense on the top of the income statement. So we are just trying to balance it by saying if the interest expense is sitting as part of the NIMs computation, then we should bring the interest income also as part of the NIMs computation. Yes. So that’s what we did. You can check it. And then you mentioned the rate. I did say we used NIFEX. The NIFEX rate at June was 344, [naturally], NIFEX. Okay. Thank you very much Ola.


Olamipo Ogunsanya, Renaissance Capital, Research Division – Sub-Saharan Africa Banking Analyst [76]


I have a follow-up question on the coverage ratio.


Peter Amangbo;Group MD, CEO & Executive Director, [77]


Okay. Yes. On the coverage ratio. Yes, please. [We didn’t see that.]


Mukhtar Adam, Zenith Bank Plc – CFO [78]


Okay. [You didn’t see.] Okay. I think you did ask if we don’t want to write-off because we have huge coverage ratio, right?


Olamipo Ogunsanya, Renaissance Capital, Research Division – Sub-Saharan Africa Banking Analyst [79]


Yes. So shouldn’t you be able to write-off now? Or is the product listing some of these impairment subsequently?


Mukhtar Adam, Zenith Bank Plc – CFO [80]


Yes. There are procedures for write-off, both from the customer side, from our side and even from regulatory side. So you have to go through the procedures and assess the situation. But if any of the loans meet those requirement, and we feel that it is in the interest of their bank to do that write-off, we will do it when the opportunity or when it is the best for us to do, and we’ll also go through the procedures before we go through a write-off.


Operator [81]


There’s one further question in the queue so far. (Operator Instructions) So the final question in the queue so far comes from Michael (inaudible) of Standard IPC (inaudible).


Unidentified Analyst, [82]


I just wanted to find out what your yield on asset was for H1 2018?


Peter Amangbo;Group MD, CEO & Executive Director, [83]


What’s what?


Unidentified Analyst, [84]


The yield on asset.


Peter Amangbo;Group MD, CEO & Executive Director, [85]


Yield on assets?


Unidentified Analyst, [86]


Yes.


Unidentified Company Representative, [87]


Okay. Thanks for your question. So I’ll give you the breakdown, and I’ll give you the consolidated. Yield on trade has dropped as expected, dropped about 10% because most of the yields came down. Yields on loan came down to about 15% or thereabouts. So the weighted average yield is around 13%. These are estimates. I can give you the specifics when you call me later. But it’s about 13%.


Peter Amangbo;Group MD, CEO & Executive Director, [88]


Okay. Thank you very much. Do we have any further questions from the audience?


Operator [89]


We do indeed, 3 more have come through. The first is from [Paul Frost] of Bain Capital Management.


Unidentified Analyst, [90]


Just had a question on the interest expense for Q2. So you did a great job explaining why interest income had come down 41% in Q2 year-on-year. But I’m struggling to reconcile interest expense being down 63%. Perhaps you can explain that to me?


Mukhtar Adam, Zenith Bank Plc – CFO [91]


Okay. Interest expense in Q2. If you look at our — we said we are letting go expensive fixed deposits. So in Q1, we have a lot of expensive deposit that flowed through from last year, from 2017 that matured into 2018. So those were still at high risk. So in Q1, the interest expense rate was high relative to — compared to Q2 stand-alone because when those expensive deposit matured in Q1, we have either let — have to let them go or we reprice them. So Q2 alone has much lower pricing for fixed deposit than Q1.


Unidentified Company Representative, [92]


And on the FX side, we also look probably, most of our dollar taking. So before there in 2015, 2017 we’re taking dollars [76%] but (inaudible) about 4.5% and that was quite significant because with the ancillary movement and the drop in the interest expense in dollars, it has massive impact on the interest expense as well.


Unidentified Analyst, [93]


Can you give me an idea of how much the rates came down?


Peter Amangbo;Group MD, CEO & Executive Director, [94]


Well, I think you just mentioned the word for dollar now. That’s almost close about 40%, for the yuan for USD and it was for naira, it’s almost above that. And you have to appreciate the fact that, even in terms of both the USD and the fixed deposit, even current accounts too, we’re had to crush the interest we pay on some of the customer. And deposits too, in terms of volume, you — I’m sure will have seen the drop, which is also part of why the interest expense on deposit dropped. Any further questions?


Operator [95]


Yes, we have 2 further questions in the queue. The first is from (inaudible) of (inaudible) Metrics.


Unidentified Analyst, [96]


I have 2 questions. The first question was the oil and gas loans, I think that’s largely been (inaudible), but do you have any concerns concerning your loans to air and energy? Then the second question, I’d like a bit more, if you could shed some more thoughts on your retail banking. You’re targeting an increase in the electronic banking income. So could you specify, do you have any year-end targets for that?


Peter Amangbo;Group MD, CEO & Executive Director, [97]


Let me say — you asked the question whether we have any concern about air. The way you have, any of your customer, any of your loan where you have challenges, of course you will have concern. So to answer your question, yes, we have concern. But we are hopeful that all the issues around the assets will be resolved. On the electronic banking channel, talking about do we have a target for income? Of course, we have a target for what we expect to end across all the channels. But the important thing is that you can see that we are growing steadily, and we expect that for H2, that growth will also continue. Last question, please.


Operator [98]


And our final question comes from Jerry Nnebue of Cardinal.


Jerry Nnebue, CardinalStone Partners Limited, Research Division – Analyst [99]


Just a follow-up question on 9mobile exposure. I just want to know (inaudible) details of the acquisition. (inaudible) is no one’s (inaudible) anyway that’s coming from that particular exposure. And then also do you envision any worst-case scenario, where you have to defer the payments on that loan?


Peter Amangbo;Group MD, CEO & Executive Director, [100]


Well, on the 9mobile, we said a lot on the 9mobile. In terms of update, go ahead.


Michael Anyimah, Zenith Bank Plc – Head of IR [101]


For 9mobile, the sales process is very much on, and we expect that pretty much soon, we will have closure to the deal. And we don’t expect that we’ll have any additional impairment or provision taking place there. Well, write-back, I think we like to take it one at a time. We like to be conservative. The most important thing is that we are not going to be taking additional impairments. So the closure of the transaction will determine if we are going to be having a write-back or not.


Peter Amangbo;Group MD, CEO & Executive Director, [102]


Okay. Thank you very much, and let me use this opportunity to thank everyone that dialed in for your time and for your very insightful questions. And analysts, at the same time that we’ll continue to adhere to best practices. We’ll continue to be very prudent while being very, very aggressive.

I want to thank all our staff and all our stakeholders for the good performance in H1, and we hope that H2 will also end on a very positive note. As we’ve said earlier, we still see opportunities in retail. We see opportunities also in corporates, an area we’ve done very well over time. And also from our treasury and liquidity management, we expect that we should be able to close the year on a very decent note. So I want to thank you once again. Good afternoon, and thank you. Bye for now.


Operator [103]


This now concludes the conference. Thank you all very much for attending. You may now disconnect.

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